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Canada's Regulator Plans New Hedge Fund Regime

by Carla Johnson, Investors Offshore, London

23 February 2007

The Canadian Securities Administrators announced on Tuesday they are seeking comments on a proposed rule to force all hedge funds to register under a set of national, harmonized guidelines.

The proposed Rule harmonizes registration requirements that exist in various acts, rules, regulations, notices and practices across the CSA jurisdictions into a single national instrument. It also significantly reduces the number of registration categories for firms and individuals.

“The proposed Rule creates a single registration regime across Canada which will reduce some of the costs of regulation to many market participants and improve regulatory efficiencies,” said Jean St-Gelais, Chair of the CSA and President & Chief Executive Officer of the Autorité des marchés financiers (Québec). “Securities regulators are committed to the ongoing harmonization of registration requirements across the CSA and with self-regulatory organizations.”

Proposed National Instrument 31-103 Registration Requirements, the proposed Companion Policy and the CSA Notice and Request for Comments are available on various CSA members’ websites. The comment period is open until June 20, 2007.

The CSA plans to host a series of stakeholder meetings across the country during the comment period to ensure stakeholders have an adequate understanding of the proposed Rule and have another opportunity to provide feedback. In addition to this, regional consultations may also be held with key stakeholders to collect additional feedback and to ensure proper understanding of the proposed rule.

The CSA's plans are a delayed response to the spectacular collapse of Portus Alternative Asset Management two years ago: Portus had collected about C$800m from 26,500 investors when it collapsed in 2005. Founder of Portus Boaz Manor - who fled to Israel after Portus collapsed - and co-founder Michael Mendelson have been charged by the Ontario Securities Commission with failing to act in good faith with clients. Mendelson was also charged with unregistered trading and issuing securities without filing a prospectus. The maximum penalties are C$5 million and five years in jail.

1,000 financial advisers, including Manulife Financial Corp., who were paid commissions for recommending the investment to their clients have returned the money. KPMG, receiver for the Portus fund, said in December that it was nearly ready to begin distributions to investors, and estimated that about 85% of funds would be returned, but gave no timescale. KPMG also asked the Ontario Court to allow those investors who invested in registered plans (about half of Portus's 26,000 clients) to receive payouts and put the money into a further registered plan with triggering a taxable event.

KPMG said last summer that about $662.15 million (Canadian) and about $37.2 million (US) of Portus assets have been found and secured in 130 bank and investment accounts in Canada, the Turks and Caicos and the Cayman Islands, out of more than $800m that was collected by Portus. The majority of Portus assets remain tied up in notes issued by France's Société Générale which were purchased for $529m, and mature between 2008 and 2011.

Under the new CSA plan, hedge fund managers and sales staff would also undergo checks. Canadian hedge fund assets are estimated to top CS$30bn.

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